Fair Value Measurement Flashcards
What is Fair Value Measurement?
FV measurement involves determining the price of an asset or liability could be traded for in an orderly transaction between market participants at the measurement date, often using income, or cost approaches.
What are the 3 approaches to FV measurement?
Market approach - uses prices and information from market transactions for identical or comparable assets.
Income approach - converts future amounts, like cash flows, to present value using discount rates.
Cost approach - uses the cost to replace the asset.
Classify the Fair Value Hierarchy level inputs used when measuring FV.
Level 1 - observable inputs - quoted prices in active markets for identical assets and liabilities on the measurement dates when no adjustments are required.
Level 2 - observable inputs other than level 1. Inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. Level 2 inputs include quoted prices for SIMILAR assets or liabilities in active markets.
Level 3 - unobservable inputs for the asset or liability reflecting the entity’s judgement about the assumptions that a market participant would use.
How do you calculate FV measurement if no principal market exists.
Step 1 - Determine the most advantageous market by finding the best price after considering transaction costs.
Step 2 - Determine the FV from the stock price.
When there is not a principal market, the price in the most advantageous market is the FV measurement. Although transaction costs are not included in the FV measurement, they are used to determine the most advantageous market.
Net Price = Quoted Price - Transaction Costs
Define Fair Value
FV is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date. It is market based measure, not entity based measure.
How is the FV determined with Buildings?
Regarding a building, which is an assets, FV is the price that would be received to sell the building in a orderly transaction between market participants in the principal market (or most advantageous market in the absence of a principal market) between market participants at measurement date.
What happens when the principal market cannot be identified in FV measurement?
If the principal market cannot be identified, the most advantageous market should be used when determining FV of a financial asset.
If the question presents sale proceeds NET of transaction costs, you must add back the transaction costs to determine FV of the asset.
